AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2022 (3) TMI 1511
X X X X Extracts X X X X
X X X X Extracts X X X X
.... discuss the functions performed under each of the segments while discussing the adjustment determined by the TPO). In the TP study maintained for the year under consideration, the Assessee treated all the international transactions as being at arm's length. During the year, the Assessee also recovered certain advertisement expenses from Intel USA ("Intel") and Microsoft USA ("Microsoft"). Since the transactions were with unrelated parties, the assessee did not benchmark the same. During the course of assessment proceedings, reference was made to the Transfer Pricing Officer (TPO). The TPO passed an order dated 29.01.2013 under Section 92CA of the Income-tax Act, 1961 ("the Act") determining a TP adjustment aggregating to Rs. 250,07,40,281/-, comprising of the following: A. Adjustment of Rs. 53,91,00,000/- determined in the trading segment by ignoring the segmental details along with reconciliation with the financials provided by the Assessee and completely ignoring the installation revenue which according to the assessee, was an integral component of the sales effected in the trading segment; B. TP adjustment determined by bifurcating the technical and marketing support servic....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion and in conducting a fresh comparability analysis by introducing various filters in determining the arm's length price. c) The learned AO / learned TPO erred in including the following companies that do not satisfy the test of comparability and should be rejected. * Infosys BPO Ltd *Accentia Technologies Ltd *Cosmic Global Ltd * Eclerx Services Ltd d) The learned AO / learned TPO erred in the computation of mark-up for Allsec Technologies Limited. The learned TPO has erroneously considered the provision for bad and doubtful debts as non-operating in nature. e) Having accepted that the appellant is a limited risk contract support service provider, the learned AO / learned TPO erred in not providing appropriate adjustment towards the risk differential, when the com parables selected are full - fledged entrepreneurial companies. 8.1.2 Marketing Support Services a) The learned AO / learned TPO erred in arbitrarily arriving at segmental profit with respect of Marketing support services segment. b) The learned AO / learned TPO erred in adding a mark-up on the impugned marketing support services segment without appreciating the fact that the mark-up on cost is....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and the Hon'ble DRP has erred in not placing reliance on the decision of the Hon'ble Supreme Court in the case of ICDS Ltd. vs. Commissioner of Income Tax. Mysore & Anr (2012-ITS -01-SC) 14. Disallowance of Provision for Warranty and Warranty expenses - Rs. 821,556,000 A. Disallowance of Provision for warranty - Rs. 57.40 crores *The learned AO has erred in not placing reliance on the decision of the Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd vs. Commissioner or Income Tax (SC) [2009] 80 Taxmann 422. B. Warranty Expenses - Rs.24.76 crores *The learned AO and the Hon'ble DRP erred in disallowing the warranty expenses of Rs.24.76 crores without considering the details submitted during DRP proceedings. 15. Unexplained expenditure A. Freight - Rs. 376,642,988 *The learned AO erred in invoking section 69C without appreciating that, provisions of section 69C is applicable only in case if no explanation offered on the source of income for the expenses under consideration. *The learned AO and the Hon'ble DRP have erred disallowing the freight expenses under section 69C without considering the detail submitted during DRP pr....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Margin over cost 1.79% 6.1 The Assessee had submitted to the TPO by reconciling the segmental details with the financials (refer page 5566 of the paperbook-Vol.12), wherein the net mark up on cost was 2.23%. The details of the same are as follows:- Total Income Rs. 6,22,30,99,230/- Total Cost Rs. 6,08,74,11,808/- Profit Rs. 13,56,87,422/- Margin over cost 2.23% 6.2 The Comparison of the benchmarking approach adopted by the Assessee and TPO are as follows:- Particulars Assessee TPO Methodology adopted Transaction Net Margin Method ('TNMM') TPO accepted the method, the PLI and the comparables selected by the Assessee. (refer page 15 of the TP Order) Profit Level Indicator ('PLI') OP/OC Database used PROWESS and CAPITALINE Comparables selected 59 6.3 In trading segment, the dispute primarily arises as the TPO rejected the segmental details reconciled with the financials furnished by the Assessee and recast the same by ignoring the installation revenue. According to the assessee, installation revenue was integral to the sales effected in the segment, for which a composite price was charged and received from the customers. The TPO arrived at the operating margin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....xclude it if the expenses are included. - Re-adoption of incorrect depreciation cost: The DRP observed that the cost allocated by the TPO was lesser than the cost allocated by the Assessee and directed the TPO to examine the same and adopt the correct value. 6.6 Pursuant to the DRP's directions, final assessment order was passed. Despite the directions issued by the DRP to have a relook at some of the items to arrive at the segmental margin, effect to the same was not given in the final assessment order and the adjustment originally made in the trading segment was sustained (refer pages 55-56 of the final assessment order). Aggrieved by the Final Assessment Order, the assessee has raised the issue before the Tribunal. The ground in the assesee's appeal pertaining to the trading segment is as follows:- "TPO erred in arbitrarily arriving at segmental profit/loss in respect to the trading segment (Ground No. 7.1)". 6.7 The learned AR has filed a brief written submission. The learned AR elaborately explained the each of issue raised vis-avis the financial of the assessee. The brief point raised by the learned AR are as follows:- "The TPO had proposed to recast the segmental det....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the paper book Vol.2. For ready reference, the reconciled segmental details with the financials of the assessee is reproduced below:- Particulars Trading Segment Manufacturing Segment Marketing and Technical Support Segment Total Revenue Sale of traded items 5,44,72,87,852 24,51,54,28,430 29,96,27,16,282 Less: Duty (6,05,29,065) (1,98,09,13,045) (2,04,14,42,110) Net Sales 5,38,67,58,787 22,53,45,15,385 27,92,12,74,172 Installation and others - allocated 83,63,40,443 30,95,39,557 1,14,58,80,000 Income from support services 46,53,65,615 46,53,65,615 Income from lease financing 33,61,000 Total Revenue 6,22,30,99,230 22,84,40,54,942 46,53,65,615 29,53,58,80,787 Expenditure Cost of goods sold 4,70,06,96,259 18,81,52,22,000 - 23,51,59,18,259 Salaries bonus 18,61,70,520 84,18,47,475 17,57,39,795 1,20,37,57,790 Contribution to provident and other funds 1,44,61,522 6,13,30,594 1,29,56,671 8,87,48,787 Staff Welfare 20,16,540 1,03,98,228 21,22,306 1,45,37,074 Particulars Trading Segment Manufact....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nstallation services to the customers for the goods purchased by them. This is evident from the TP study at para 3.2.5 at page 5647 of the paperbook-Vol.12 where it is categorically stated that the Assessee also inter alia provides installation services to the customers in India, and in appendix 13 to the TP study at page 6049 of the paperbookVol.12 installation income has been included in the operating revenue base of the trading segment. Therefore, the TPO's observation at para 1.2.(b) at page 34 of the TP order that the Assessee has not shown that installation is part of the trading sales from its TP study is incorrect. The revenue from installation services reflected in the financials of Rs. 114.58 crores includes installation revenue pertaining to the trading segment of Rs. 83 crores and installation revenue pertaining to the manufacturing segment of Rs. 30.95 crores. This bifurcation was given in the segmental details furnished to the TPO vide submission dated 25.01.2013 (refer page 5566 of the paperbook-Vol.12) The TPO ignored the installation income as provided in the segmental details furnished to her, without assigning any reasons for doing so and more importantly when sh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....In the subsequent years too, the Assessee has treated the installation revenue as a part of the operating income for the trading segment. This treatment came to be accepted in the subsequent years. 6.9.2 Further, the TPO in the show cause notice dated 11.01.2013, proposed to consider the value of opening stock at Rs. 1.53 crores (refer page 5589 of the paperbook-Vol.12). On the Assessee's objections, the TPO agreed with the Assessee's contention and agreed to consider the value at Rs. 1.39 crores (refer page 34 of the TPO's order). While so, effect to the same was not given while computing the adjustment. The correct value of opening stock is Rs. 1.39 crores as recorded in the financial statement at Note 12 on page 6281 of the paperbookVol.13. While the DRP observed that the TPO had agreed to correct this error, and directed the TPO to do so, effect to the direction was not given in the final assessment order. 6.9.3 The other anomaly of the TPO's order is that while computing the margin of the trading segment, the TPO has not excluded from the operating expenses an amount of Rs. 40.31 crores, which according to the assessee pertains to the MSS segment. This cost pertains to the M....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e by providing telephonic technical and customer care support for standard problems which do not require on-site services. The Assessee merely co-ordinates for the warranty services for the customers of the AEs. The AEs bears all risks and costs related to replacement of parts and services and provide all such on-site services through third parties/the Assessee. (iv) All expenses incurred in this segment, including the value of spare parts are borne by the AEs. The cost of services rendered by the Assessee to the AEs for discharge of the AEs warranty obligation are reimbursed at cost plus 5% mark-up (refer page 5659 of the paperbook-Vol.12). (A summary of functions performed by the Assessee are available at page 5661 of the paper book- Vol.12). 7.1 The Net mark-up on cost earned by the Assessee (as per the TP study) are as follows:- Services revenue Rs. 24,84,09,000/- Allocable Cost Rs. 23,66,57,000/- Profit on allocable costs Rs. 1,17,52,000/- Margin over cost 4.97% 7.2 The Comparison of the benchmarking approach adopted by the Assessee and TPO are as follows:- Particulars Assessee TPO (ITES) TPO (MSS) Methodology adopted Transaction Net Margin Method ('TNMM') T....
X X X X Extracts X X X X
X X X X Extracts X X X X
....segments are as follows:- (i) It is submitted that under the technical and marketing support services segment, the Assessee does not render any services in the nature of ITES. The services rendered are in the nature in the nature of marketing support services and incidental technical services. On the erroneous basis that what the Assessee does is merely dissemination of information using IT media, the TPO held that the services are in the nature of ITES. (ii) It is submitted that services cannot be termed as ITES merely because they are rendered using information technology. If that interpretation is accepted, then virtually every service rendered using a computer device or other technology would become an ITES, which is grossly erroneous. (iii) It is submitted that under the technical and marketing support services segment, the Assessee does not render any services in the nature of ITES. The services rendered are in the nature in the nature of marketing support services and incidental technical services. On the erroneous basis that what the Assessee does is merely dissemination of information using IT media, the TPO held that the services are in the nature of ITES. (iv) It....
X X X X Extracts X X X X
X X X X Extracts X X X X
....anty support and co-ordination, i.e., call centre support is not being provided by the Assessee directly to its AEs. The Assessee has outsourced these services to another Group Entity in India which is compensated at an arm's length mark-up of cost plus 15%. (ix) Pertinently, for the assessment year 2013-14, the DRP granted relief to the Assessee by holding that the services rendered are in the nature of marketing support services (refer page 10 of the directions). (x) It is submitted that if the above submissions are accepted, even taking into consideration the arm's length mean margin of the comparables arrived at by the TPO, the margin of the Assessee's technical and marketing support services segment will be at arm's length. 7.7 The learned Departmental Representative supported the orders of the TPO and the DRP. 7.8 We have heard rival submissions and perused the material on record. The TPO held that services under the technical and marketing services segment is essentially dissemination of information and the assessee is acting as communication channel between the customers and the AEs using IT medium. According to the TPO, those services rendered by the assessee are to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n 22-26, against comparability analysis of comparables relating to ITES functions are rejected as infructuous." 7.8.2 The functions performed by the assessee under this segment are prima facie identical for the concerned assessment year and for the assessment year 2013-2014. For assessment year 2013-2014, when the DRP had held that services rendered by the assessee are in the nature of marketing and support services and since no appeal preferred by the Revenue to the ITAT, the matter had attained finality. Therefore, we are of the view that the entire TP issue raised under marketing support services segment needs to be examined afresh by the AO / TPO in the light of the DRP's directions for assessment year 20132014. It is ordered accordingly. 7.8.3 Since assessee's main issue relating technical and marketing support segments raised in grounds 8 and 8.1 are restored to the AO / TPO for fresh consideration, the other subsidiary grounds in this segment also needs to be restored to the TPO for fresh adjudication (As the same would be relevant if TPO rejects the assessee's contentions in ground 8 and 8.1). Therefore, ground 8.1.1(a), 8.1.2(b) and 8.1.1(c), additional grounds 1, 9(a) a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... by the assessee 14.57 crore ALP at 10% on cost 1.58 crore Profit already shown Nil Adjustment 16.11 crore 8.2 Aggrieved by the above TP adjustment, the assessee filed objections before the DRP. The DRP directed the TPO to verify whether warranty expenses incurred on behalf of AE's is separately accounted and reduced from cost and if so, no adjustment is warranted. The directions of the DRP in brief are as follows (refer pages 21-22 of the DRP's directions): (i) Since the services were rendered by third parties to the AE and the Assessee was merely used as a medium, the DRP held that a mark-up cannot be charged on the warranty amount; (ii) Since it was not clear whether the Assessee had reduced the reimbursements from the costs or accounted for it separately, the DRP directed the TPO to verify the treatment and if accounted for separately or reduced from costs, that no adjustment is warranted. 8.3 The directions of the DRP was not given effect final assessment order and the adjustment originally made segment was sustained (refer pages 55-56 of the final assessment order). 8.4 Aggrieved by the TP adjustment of Rs.16.11 crore in the final assessment order, the assessee ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as to show that expenses in relation to providing support services for AEs warranty obligation are either reduced from the cost or accounted for separately. The DRP in fact directed that since the services in relation to the warranty obligations are provided by third party service providers and the assessee is only coordinated for the same, no mark up is warranted. The relevant finding of the DRP in this regard reads as follows:- "6.6.6 The assessee is directed to demonstrate to the TPO that the above reimbursement has either been reduced from the costs or accounted for separately. In absence of such demonstration, the TPO can take the above to be a part of the warranty costs debited to the P&L account and effect suitable adjustment. Since the services related to warranty are being handled by a third party and the assessee is being used only as a medium, the TPO is not correct in charging a markup on this amount. Hence, the objection relating to markup on the warranty cost is upheld. The TPO cannot charge a markup on warranty amount as such services are not rendered by the assessee to its AE." 8.7.1 In the light of the above directions of the DRP, which we are in consonanc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ubmission dated 18.12.2012 (Pages 1721 at Volume 5 and 3453 at Volume 8 of the paperbook) iv. Submission dated 22.01.2013 (Pages 4753, 4759,4859, 5075, Volume 10 of the paperbook) v. Submission dated 20.02.2013 (Pages 4271 and 4305, Volume 9 of the paperbook) (iii) Before the DRP, the Assessee had submitted additional details vide its submissions dated 08.10.2013 (Page 557, Volume 2 of the paperbook) giving details of the taxes deducted at source as also details of expenses which did not require tax deduction at source, along with ledger extracts. (iv) Before this Hon'ble Tribunal, the Assessee has filed an application for production of additional evidence on 05.11.2018 vide which additional details for an amount of approximately Rs. 24.10 crores has been submitted along with ledger extracts along with details of TDS wherever applicable. It was submitted that on consideration of the additional evidence together with the details submitted to the AO, it is clear that on all the amounts debited to the P&L Account, either tax has been deducted at source or the amounts are of a nature which do not require tax deduction at source. 9.3 The learned Departmental Representative supp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....4,39,964 -- -- 86297287 4084057 20703428 3,55,192 Advertisement 12,15,75,766 7,26,35,204 -- 23116555 4663326 21096308 64,373 Repairs and maintenance 1,93,56,768 Total 55,30,36,094 7,68,26,271 28627543 192051405 110388862 123767171 20,18,07 4 The details of repairs and maintenances are as under:- Repairs and Maintenance Particulars Amount Amount debited to profit and loss account 28,01,66,000 Less : Amount voluntarily disallowed u/s 40(a)(ia) 2,70,56,573 (I) 25,31,09,427 Amount for which details of TDS details have been submitted 36,96,39,920 Less : Capital expenditure not debited to profit and loss account. 12,95,80,993 (II) 24,00,58,927 Balance (III=I-II) 1,30,50,500 Less : Amount on which TDS is not applicable, details of which was filed before DRP but not considered in order (IV) 62,11,652 Less : Additional evidence filed before this Hon'ble Tribunal on 05.11.2018 on which TDS is not applicable (V) 68,06,111 Balance for which details not filed (VI) = III-IV-V 32,737 9.4.2 The above reconciliation submitted needs to be verified by the TPO. The DRP in its order directed the A.O. to ver....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... service tax returns disclosed Rs. 189,78,40,682 as the amount on which service tax liability was discharged. Thus, prima facie there was a difference in service revenue of Rs. 72,98,00,682. During the assessment proceedings assessee submitted that, the above said difference was due to the following reasons: (i) Rs. 54,81,88,597/- represents service tax paid as a service recipient (not as a service provider) with respect to Information Technology Software Service (ITSS) availed by the Company from outside India. This being an expenditure for the Company, this cannot be considered as service income (ii) Balance amount of Rs. 18,16,12,085/- pertains to revenue, the recognition of which is deferred to future years. 10.1 In the draft assessment order (refer page 41 to 44) the AO disregarded the explanation furnished by the Assessee as regards the difference and brought to tax the difference between the income reflected in the P&L Account of Rs. 116,80,40,000/- and the amount reflected in the service tax return of Rs. 189,78,40,682/- i.e., an amount of Rs.72,98,00,682/- to tax as undisclosed income. 10.2 Aggrieved, the assessee filed objection before the DRP (refer page 35 to 40).....
X X X X Extracts X X X X
X X X X Extracts X X X X
....age 319 read with pages 331 to 361 of Volume 2 of the paperbook * Journal entries along with back-up details - pages 363 to 389 of Volume 2 of paperbook * General Ledger extracts/screenshots providing details of the accounting entries passed in the books of account (Page 317 of Volume 2 of the paperbook) * Sample copies of Form 15CB certificates covering an amount of approximately Rs. 43.68 crores - pages 391 to 431. * As regards the balance Rs.18,16,12,085 though it was submitted initially that the same was on account of deferment of income, on further analysis, reconciliation was given and the reconciliation clearly indicate that the amount reflected in profit and loss account is more than the amounts as per service tax return. 10.4 The learned DR supported the findings of the A.O. and the DRP. 10.5 We have heard rival submissions and perused the material on record. The Assessing Officer in the draft assessment order brought to tax as undisclosed income, the difference reflected in the profit and loss account of Rs.116,80,40,000 and the amount reflected in the service tax return of Rs.189,78,40,682, i.e, the amount of Rs.72,98,00,682. The DRP in its order though directe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....0 Higher income as per financials (A-B) 14,63,51,350 Add: Income from product sale of peripherals and accessories grouped under service income in the financials on which no service tax applicable -Identified to the extent of Rs.14,24,71,202 -(C) 14,63,51,350 Revenue as per service tax return matching with financials-(B)+(C) 114,58,80,000 10.5.1 The above reconciliation clearly indicate that the amount reflected in the profit and loss account is more than the amounts as per the service tax return. The break-up of the services income as per the profit and loss account are detailed as under:- Description Amount (in Rs.) Installation and Others 114,58,80,000 Income for Support Services - Technical and Marketing services 2,21,60,000 Total 116,80,40,000 10.5.2 The break-up on which the service tax is paid is as under:- Description Amount (in Rs.) Management, Maintenance or Repair Services 13,15,38,280 Erection, Commissioning or Installation Services 41,94,88,681 Information Technology Software Service 44,85,01,689 Information Technology Software Service (ITSS) - Reverse Charge 54,81,88,597 Technical Support Service 11,59,80,626 Marketing Support Service 23,4....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... The A.O. is directed to afford a reasonable opportunity of hearing before a decision is taken on the issue. It is ordered accordingly. Disallowance of depreciation claimed on assets given on lease and taxation of future lease rentals (Ground No. 13) 11. The brief facts of the issue raised in ground 13 are as follows:- The assessee is engaged in the business of manufacture and trading in computers and the said computer equipment are also given on lease. It is stated that in terms of Accounting Standard -19, the assessee had in its books of account, recorded the principal amount of the lease installments to be received over the entire lease period as revenues and the cost relating to the computers was debited to the P&L Account. It was stated that for the purposes of income-tax, the assessee being the owner of the asset, the principal amount of lease rental which had accrued during the year was offered to tax and thus, Rs. 2,93,13,022/- pertaining to future years was reduced from the income. Depreciation allowance was claimed under section 32 on the cost of the leased assets. 11.1 In the draft assessment order, it was held as follows (refer page 50 to 53) (a) As per certain c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e agreement between assessee/lessor and lessee establish assessee / lessor is the owner of asset. The right to inspect, right to return of equipment were the salient terms noticed by the Hon'ble Supreme Court in the case of ICDS (supra) as well and it was held that the mere fact that the equipment could be transferred to the lessee at the end of the lease period for a nominal value, would not take away the lessor's right to claim depreciation. * The clauses relied on by the A.O. does not indicate that the lessee is the legal owner of the asset. On the contrary, the clause provides that the Lessor shall make payment of the taxes and will be entitled for a reimbursement from the Lessee. Insurance albeit maintained by the lessee shall be to the satisfaction of the lessor. Also, the costs incurred which are recurring in nature and incidental to operating the asset, it is the responsibility of the lessee to bear (cost incurred in normal course of usage). * The detailed submissions in this regard made before the AO in the submissions dated 18.12.2012 (At page 1693 of Volume 5) and 20.02.2013 (at page 4277 of Volume 9) and also before the DRP vide submission dated 08.10.2013 (Pages 24....
X X X X Extracts X X X X
X X X X Extracts X X X X
....udgment in the case of ICDI (supra) was rendered in the context of motor vehicles and is inapplicable to the assessee. The DRP confirmed the finding of the A.O. by relying on the judgment of the Hon'ble Apex Court in the case of ABB (supra). The DRP held that all the risk and liabilities in respect of the assets leased transferred to the lessee, whereas in the case of ICDS (supra), the same remained in the exclusive ownership of the lessor, and therefore, the assessee cannot take the support of the judgment of the Hon'ble Apex Court in the case of ICDC (supra). The DRP further held that Circular No.2 dated 09.02.2001 is not applicable to the facts of the assessee since the ownership of the assets does not belong to the assessee-lessor. 11.5.1 As per section 32 of the I.T.Act, for claiming depreciation, the assessee should be the owner of the asset and must have used the said asset for the purpose of its business. We find that the there is no distinction between an operating lease and finance lease for the purpose of the Act. The CBDT Circular No.2 dated 09.02.2001 provides that "AS 19 requiring capitalization of the asset by the lessees in a finance lease transaction will have no ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssee. The Hon'ble Apex Court in the case of CIT v. Shaan Finance (P.) Ltd. (1998) 97 Taxman 435 (SC) and also in the case of ICDS (supra) had held that when the assessee is in the business of leasing and in the course of the business of leasing had leased out the equipment, the assessee / lessor has used the said assets for the purpose of its business and was entitled to the benefit of depreciation. Since there is no proper examination by the A.O., we restore the issue to the files of the A.O. for de novo consideration. The A.O. is directed to examine afresh who is the owner of the asset during the relevant assessment year. The assessee shall also produce necessary proof that General Motors India Private Limited (the lessee of the assets) has not claimed depreciation on the assets leased (a similar finding was rendered in the case of ICDS (supra) - refer para 26 of the judgment). Further, the A.O. shall render a finding whether the assessee, apart from the business of manufacture of computers, is also in the business of leasing of computer equipments. With the above said directions, we restore to the files of the A.O. the question as to whether the assessee / lessor is entitled to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....12. The brief facts of the issue raised in ground No.14 are as under:- During the assessment 2008-2009, an amount of Rs. 211,41,68,000/- was debited to the Profit and Loss account towards Warranty expenses. It was stated that out of the same, Rs. 57,39,66,000/- represents provision for warranty expenses and the balance Rs. 154,02,02,000/- represents actual warranty expenses incurred during the year for servicing products under warranty. According to the learned AR, the Assessee had submitted a detailed write-up on the methodology for estimating warranty cost on a scientific basis before the AO and had provided evidence for an amount of Rs. 129.26 crores out of the actual expenses of Rs. 154.02 crores. The AO disallowed the provision for warranty of Rs. 57,39,66,000/- on the ground that it is not scientific and also disallowed expenses towards utilization of warranty amounting to Rs. 24,76,00,000/- crores on the ground that no evidence was submitted in support of such warranty expenses. 12.1 Aggrieved by the Draft assessment order, the assessee preferred objections before the DRP. The DRP confirmed the disallowance of actual expenses incurred towards warranty to the extent of Rs. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... cost involved for servicing the units for which the warranty period has not expired as on that day. (viii) Accordingly, the system would automatically exclude those products for which the warranty period has expired and include only those products (i.e. products sold in past for which warranty period has not expired and products sold during the year with a warranty commitment) for which warranty period has not expired. (ix) Thus, based on the above accounting methodology, as the reversals get adjusted with the provision required to be created in the subsequent years, it, in effect, leads to the same being credited to the Profit and Loss account in the subsequent year. (x) Detailed submissions as regards the methodology of creating the provision is made before the AO in the submissions dated 07.11.2012 (at pages 1001 to 1011 of Volume 4 of the paperbook) and the submission dated 18.12.2012 (At page 1715 of Volume 5) and also before the DRP vide submission dated 08.10.2013 (Pages 537-551 of Volume 2 of the paperbook) 12.3 The submission of the learned AR as regards disallowance of Rs.24.76 crore (expenditure on warranty) are as follows:- (a) Out of the total warranty expens....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed on the basis of a unique identification number attached to each IT hardware so as to identify cases of faults. The warrant cost is a product of the Field Incident Rate i.e., the number of repairs and the Cost per Incident. Field Incident Rate is determined based on the actual faults reported over the earlier years, the Cost per Incident is determined a scientific basis based on the past experience, which is the sum of the following: - Cost of Spare Parts; - Cost of logistics; and - Labour cost The Assessee writes back the difference between the warrant provision made for a particular year and actual expenditure incurred in the subsequent year, in the subsequent year. 22. It is not in dispute before us that the basis on which the provision for warranty was made was identical in AYs 2002-03 & 2003-04 as well as in AY 2005-06. The Tribunal has in the appeal for the AYs 2002-03 & 2003- 04 after considering the method of providing for warranty liability by way of a provision, specified that the provision made was based on past history and was on scientific method of estimating liability on account of warranty claims. It is clear from the chart which has been extracted in th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t are tracked on the basis of a unique identification number attached to each IT hardware so as to identify cases of faults." He also placed a chart in the paper book showing methodology of provision for warranty: From the above details, it is clear that provision for warranty is made following scientific method. From the chart it is also clear that as against provision of Rs.144,114,000/- an amount of Rs.11,97,00,000/- was utilized in the subsequent year which is almost near the provision. Therefore, it could be easily said that the provision was created based on past history. The methodology followed by the assessee-company cannot be faulted with. Therefore, we direct the A.O. to allow the provision for warranty as a deduction." 12.5.2 There is no dispute before us that the basis on which the provision of warranty was made in assessment year 20022003, 2003-2004 and 2005-2006 as well as in the relevant assessment year is identical. The Tribunal in the above mentioned orders for assessment year 2002-2003, 2003-2004 and 2005-2006 after considering the method of providing for warranty liability by way of a provision, specified that the provisions made was based on past history a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the Assessing Officer vide order dated 13.02.2015. The same was challenged by the assessee before the Hon'ble High Court of Karnataka in ITA No.295/2015. The Hon'ble High Court vide judgment dated 03.02.2016, set aside the remand order passed by the Tribunal and directed the Tribunal to decided the matter on merits. Pursuant to the judgment of the Hon'ble High Court of Karnataka dated 03.02.2016, the order dated 18.03.2016 was passed by this Tribunal in ITA No.362 & 363/Bang/2007, dismissing the appeal filed by the Revenue (finding reproduced supra at para 12.5.1). 12.5.4 As regards ITAT's order for assessment year 20052006, the issue of provision warrant arose in the Revenue's appeal before this Tribunal in IT(TP)A No.1838/Bang/2013. Vide order dated 13.10.2017, the Tribunal dismissed the Revenue's appeal (finding reproduced supra at para 12.5). In the appeal filed by the Revenue before the Hon'ble High Court of Karnataka against the said order, the Revenue did not raise any ground on provision for warranty (copy of Hon'ble High Court judgment dated 09.11.2018 in ITA No.236/2018 is placed on record). In view of the aforesaid reasoning and following the orders of the Tribunal in a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....inal order is to be passed without further opportunity. 13.1 Aggrieved, the assessee has raised this issue before the ITAT. The relevant submission of the learned AR are as follows:- (a) The provisions of section 69C are applicable only in a case where the assessee offers no explanation on the source of income to incur the expenses under consideration. (b) The expenses are recorded in the books of account and the same is out of the funds generated from the routine business carried out by the assessee. Thus, in respect of expenses which are recorded in the books of account adjustment under section 69C as unexplained expenses cannot be accepted. (c) In any case, the assessee had provided detailed explanation as under: (i) The assessee incurs freight charges for: Purchase of materials i.e. Freight inwards - classified under cost of goods sold; Sale of goods i.e. freight outwards - grouped under "Operating and other expenses" in the Profit and Loss account; and Warranty services - classified under warranty expenses (ii) Certain expenses were debited under other heads like cost of goods sold, warranty etc. For instance, freight expenses incurred for purchase of goods fo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tmental Representative supported the findings of the TPO. 13.4 We have heard rival submissions and perused the material on record. The DRP in its order directed the A.O. to verify the details of explanation submitted by the assessee. The relevant finding of the DRP reads as follows:- "12.1 The Panel has carefully perused the draft assessment order, facts of the case, legal position on the issue as delineated by the Assessing Officer as well as put forth by the assessee. On the issue of disallowance of Rs.376,642,988 incurred towards freight as unexplained expenditure under section 69C, the assessee has claimed that the party-wise list of TDS details was provided to the AO for Rs.797,264,081, out of which Rs.376,642,988 represents amount subsequently reimbursed and credited to freight account and also amount debited under other heads of profit and loss account. 12.2 The panel is of the option that this aspect has not been verified by the assessing officer in the draft order. Since the AO has not verified the same, AO is directed to verify the same and if the contention of the assessee is found correct, then the claim of the assessee is to be allowed. The assessee wi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....verify their contention. During the course of draft assessment proceedings as well as before DRP no evidence was submitted by the company except grounds of objection. Hence this addition is also retained in the final order." 13.4.2 The A.O. is not justified in stating that the assessee has not produced necessary evidence in support of its objections. The assessee had given objections and necessary evidence before the AO and the DRP. The details of the same are as follows:- (a) Submission before the DRP dated 08.10.2013 - pages 212, 633 - 639 of Volume 2 of the paperbook. (b) Submission before the AO dated 07.11.2012 - pages 1011-1015, 1023 and 1333-1335 of Volume 4 of the paperbook. (c) Submission before the AO dated 20.02.2013 - pages 4273, 4285, 4599 of Vol. 9 of the paper book. (d) Submission before the AO - dated 26.11.2012 - pages 5141, 5211 of volume 11 of the paperbook. 13.4.3 Therefore, in view of the directions of the DRP, which we are in consonance with, we direct the A.O. to re-examine the issue raised in ground 15 afresh. It is ordered accordingly. 13.4.4 In the result, ground 15 is allowed for statistical purposes. Addition of VAT refund offered to tax in o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....18.12.2012 at page 1693 - 1695 of Volume 5 of the paperbook. Journal entries for an amount of Rs. 30,50,789 was also provided. (c) Thus, the entire amount was offered as income over a period of three years. (d) A summary of the above details for addition of VAT refund are as under Particulars Amount (in Rs.) VAT refund credited to Profit and Loss account 93,70,89,776 Less: VAT refund claimed with Joint Commissioner - CT 94,14,66,995 Excess VAT refund claimed as per AO 43,77,219 Less: Excess VAT refund credited to P&L account in AY 2008-09 and offered to tax 7,24,111 Less: Excess VAT refund credited to P&L in AY 2010-11 and offered to tax 36,53,108 Balance Difference Nil (e) Since the VAT refund has been offered to tax over a period of three years, there is no loss of revenue and thus the same should not be considered as undisclosed income for the current year. (f) Even if the assessee were to revise its return of income and offer the same to tax for AY 2009-10, it had sufficient losses to setoff such income. Hence, there is no loss to revenue on account of the same not being offered to tax during AY 2009-10. (g) Without prejudice, if the aforesaid VAT refund....
X X X X Extracts X X X X
X X X X Extracts X X X X
....4.5 In the result, ground 16 is allowed for statistical purposes. Disallowance of capital expenditure on the erroneous basis that the same was claimed as a revenue expenditure (Ground No. 17) 15. The brief facts in relation to the issue raised in ground 17 are as follows:- The AO during the course of assessment proceedings, had sought details of tax deducted at source on various expenses. It is stated that while providing the details for repairs and maintenance expenses, certain amounts paid to Sobha Developers, Firepro and Deva Interiors were reflected under the party-wise list of Repairs and Maintenance expenses provided. It is stated that the said details were furnished to substantiate that the Company has been compliant in deducting taxes. However, according to the assessee, it had not claimed deduction of the same on the basis that it was capital expenditure. The nature of the payments was explained as under: (i) Sobha Developers - Rs. 11,58,28,028/- The amount pertains to payment made to Sobha Developers towards Civil construction undertaken at the assessee's Chennai factory. Though the amount was initially debited to the repairs and maintenance account, the same has ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ear 2007-08 relevant to the assessment year 2008-09 and thus the expenses were capitalised as buildings during financial year 2007-08. This is evidenced by the Letter of Intent signed with Sobha Developers and the addition to buildings made during that year which is available at pages 4869-4877 of Volume 10 of the paperbook. The entry reflected in the repairs and maintenance account during financial year 2008-09 was subsequently reversed and thus, no deduction for the same is claimed during financial year 2008-09. Ledger extract of repairs and maintenance showing the debit as well as the subsequent credit entries are available at page 4909 of Volume 10 (reversal of Rs. 11,45,17,397/-). If at all, the addition should be limited to Rs. 12,15,631/- to the extent not reversed in the ledger, and consequential depreciation should be given thereon. (ii) Firepro - Rs. 52,69,401/- Though the expenses were initially debited to repairs and maintenance account, subsequently these were reversed and capitalized under buildings. Ledger extract of repairs and maintenance showing the debit as well as the subsequent credit entries for Rs.52,69,401/- and Rs.5,4....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pinion that the claim of the assessee that the expenditure has already been capitalized and not claimed as revenue expenditure in the year under consideration has not been verified by the assessing officer in the draft order. Since the AO has not verified the same, AO is directed to verify the claim of the assessee and if the contention of the assesee is found correct then the claim of the assessee to the extent expenditure not claimed in the current year is to be allowed. Any expenditure claimed in the year under consideration will be capitalized and depreciation provided at appropriate rates. The assessee will produce all the necessary documents in support of its claim. If the assessee fails to do so, the addition will survive to the extent of non-furnishing of evidence." 15.4.1 The A.O. in the final assessment order has retained the addition by observing as under:- " 14.9 Disallowance of capital expenditure: In the draft assessment order a sum of Rs.11,91,80,698/- was disallowed as capital expenditure in paragraph 2. In this connection a detailed discussion has been made in the draft assessment order. The enquiries conducted, evidences gathered, show cause notic....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s and corresponding entries was passed to account for the actual expenses along with the TDS liability. It was stated that the provision for year-end accrued expenses was reversed in the books of account of the assessee during the year and corresponding expenses were separately recorded after deduction of taxes wherever required. The AO brought to tax the said amount of Rs. 9,14,02,219/- on the ground that reversal entries ought to have been offered to tax under section 41 of the Act and also for the reason that the evidence of tax deduction at source was not provided. The DRP confirmed the draft assessment order holding that an amount disallowed under section 40(a) in an earlier year could be allowed in the current year only upon demonstrating that tax was deducted at source. Thus, the addition as per draft assessment order was sustained in the final assessment order. 16.1 Aggrieved, the assessee has raised this issue before the ITAT. The submission of the learned AR are as follows:- (a) The break-up of Rs. 9,14,02,219/- which was disallowed under section 40(a)(ia) in AY 2008-09 is as under: Sl No Particulars Amount disallowed under section 40(a) 1 Advertising 4,31,43,941....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... The additional ground raised reads as follows:- "Without prejudice to the ground No.18, the deduction ought to have been allowed in the year in which the taxes has been deducted and remitted to the credit of Central Government on subsequent payments made to the vendors as well as on the purchase orders written off, against the said provision for expenses." 16.3.1 The above additional ground is an integral part of the main issue raised in ground 18, hence, the same is admitted and taken for adjudication. 16.3.2 The assessee has also raised additional evidence. The document sought to be admitted as additional evidence are as follows:- "(a) Details of subsequent payments made to vendors and purchase orders written off in relation to Advertisement expenses amounting to INR 43,139,040, along with details of TDS, wherever applicable. Also enclosing sample copies of invoices in relation to the same. (b) Details of subsequent payments made to vendors and Purchase Orders Written-off in relation to Contractor payments amounting to INR 17,337,851 along with details of TDS, wherever applicable. Also, enclosing sample copies of invoices in relation to the same. (c) Details of s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oth the parties, we direct the A.O. to examine the issue whether the carry forward losses is to be set off to the tune of Rs.60,97,79,395 or not. It is ordered accordingly. 18.2 In the result, ground 20 is allowed for statistical purposes. IT(TP)A No.217/Bang/2014 (Revenue's appeal) 19. Six grounds are raised in the memorandum of appeal. Ground 1 and 6 are general in nature and no adjudication is called for, hence, the same are dismissed. The surviving grounds, namely, ground 2 to 5, read as follows:- "2. Whether the Hon'ble DRP is correct in sending back the issue of allocation of depreciated cost to the file of TPO with a direction to adopt the figure of Rs.2.99 as depreciation cost in trading segment. 3. Whether the Hon'ble DRP is correct and reasonable in not disallowing in payment for Microsoft Licenses ignoring the findings of TPO> 4. Whether the Hon'ble DRP is correct in upholding the objections of the tax payer relating to mark up on the warranty cost. 5. Whether the Hon'ble DRP is correct in deleting the disallowance of Forex loss of Rs.111,09,53,000/-." We shall adjudicate the above grounds as under. Ground 2 20. In ground 2, the Revenue challenges t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Dell Group for their usage and for usage in the products sold. The cost incurred by the AE in this regard are allocated to each of the Dell group entities on the basis of usage of licences by them and are recovered from them at cost. During the relevant assessment year, the assessee reimbursed an amount of Rs.170,60,69,281. The details of which is provided at pages 5584, 5625 to 5627 of the paper book Vol.2. On the payments made as reimbursement, the assessee had deducted tax at source (refer pages 5558 to 5560 of the paper book Vol.2. The assessee had also paid Customs Duty on import of licences. The licences so procured by the assessee are used in the products sold by it. In absence of installing such licences, the product sold by the assessee cannot be utilized by the cutomers. Therefore, the usage of licences cannot be doubted. Allocation of cost is as per the usage and on the payment made, tax is deducted at source. In absence of any material, the TPO cannot determine an adjustment on the basis of mere conjecture and surmises. In any event, in an adhoc manner ALP cannot be determined at Nil. Moreover, the above transactions are undertaken by the assessee on a year to year basi....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... 5,26,74,967 which has been offered to tax. 23.1 The AO in the draft assessment order held that loss on account of foreign exchange fluctuation as regards forward contracts is a contingent liability and that no evidence in support thereof was produced by the assessee. 23.2 Aggrieved, the assessee filed objection before the DRP. The DRP allowed the assessee's claim, relying on the judgment of the Hon'ble Supreme Court in the case of Woodward Governor India (P) Ltd. reported in 312 ITR 254 (SC), holding that the same was not a contingent liability and that the accounting treatment adopted by the assessee was only a timing issue. 23.3 The learned DR supported the order of the TPO. 23.4 The learned AR reiterated the submissions made before the TPO and the DRP. 23.5 We have heard rival submissions and perused the material on record. The net forex loss arising after set-off of the said gain on forward contract is as under: Nature of forex loss Amount (in Rs.) Gain on forward exchange contracts (5,26,74,967) Realised and unrealized forex loss (Net) - on settlement/re-statement of forex transaction 116,36,27,892 Amount claimed as deduction 111,09,52,925 23.5.1 The AO's obser....